WASHINGTON - Thrift profits rose 16.4% in the second quarter, to $1.35 billion, the Office of Thrift Supervision reported Monday.

Federal regulators attributed the increase to lower interest rates, which boosted the value of mortgage-backed securities in thrifts' portfolios. The percentage of troubled assets also declined, to 1.27% on June 30 from 1.34% at the end of the first quarter.

The thrift industry also reported its highest average capital ratio since regulators started measuring it in 1940, with equity capital at 7.71% of assets.

"It's hard standing up here in a regulatory environment to ever complain, particularly within this industry, that capital is too high," Jonathan Fiechter, the thrift regulator's acting director, said at a news conference Monday. But he added that high capital levels kept return on equity down and could scare away investors.

The second-quarter average annualized return on equity of the 1,478 institutions regulated by the OTS was 9.13%, up from 8.01% in the first quarter. Return on assets was 0.7%, up from 0.6%.

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